This Health Care Giant Strikes Out Again for Dividend Investors

Merck (NYSE: MRK) investors have weathered a frustrating storm for this big pharma giant's future. Between the company delaying the filing of promising osteoporosis drug odanacatib from this year to next to the looming threat of patent expirations in the next few years, this industry stalwart's wading into uncertain tides.

Monday's news didn't help the company. Merck has been trying to push surgical post-anesthesia drug sugammadex through the Food and Drug Administration for some time now, but regulators turned down the drug's approval for the second time. It's another blow to the company's stability as future cash cows are hard to find in this firm's development pipeline. Should income investors have confidence in a safe future from this big pharma giant?

Sugammadex strikes out -- againSugammadex has had a long and unfortunate history with U.S. regulators. European regulators approved the drug back in 2008, where it's now known as Bridion, but that same year -- when Schering-Plough still owned the drug, before it merged with Merck -- the FDA turned it away due to safety concerns over possible allergic or sensitivity reactions.

Merck has worked hard to bring the drug back to regulators for another pass, but it wasn't safety concerns that doomed sugammadex this time around with the FDA. This time the agency brought up concerns over Merck's clinical trials of the drugs, specifically, a trial site regarding the hypersensitivity issue.

It's far less of a concern than safety issues, but it's still one more denial by the FDA for Merck's drug. Don't expect to see sugammadex back in front of regulators any time soon.

That's not such a devastating blow for the drug's financial potential, specifically. Even back in 2008 before its first rejection under Schering-Plough, analysts projected that sugammadex would sell only between $200 million and $700 million in annual peak sales. That's far from enough to cover Merck's current losses under the patent cliff and what the company's facing in the future.

However, it does make you wonder just what's going on at Merck's R&D department.

Questions in Merck's futureMerck shook up its R&D division earlier this year with the hire of a new department chief who's vowed to cut back on spending, something that some investors have clamored for as the company's sales wane. In each of the last two fiscal years, Merck's R&D spending has topped 17% of the firm's full-year revenue.

That's a lot of spending for lackluster results, considering the denial of sugammadex, the delay of odanacatib, and the lack of many up-and-coming promising drug stars to replace the upcoming patent losses of drugs like Nasonex, Zetia, and Vytorin, which each will see patent protection expire by 2017. That's especially damaging for Zetia, Merck's second-best selling drug over the first half of the year. The drug's still managing more than 2.5% year-over-year sales growth despite being on pace to exceed $2 billion in full-year sales.

Merck's vaccine Gardasil and dominant diabetes duo Januvia and Janumet look like they'll have to anchor Merck's future for now, but that's not especially promising for income investors concerned about this company's stable cash flow. Gardasil's progressing nicely, but Januvia and Janumet are facing upstart type 2 diabetes drug Invokana from Johnson & Johnson (NYSE: JNJ) , which has garnered peak sales estimates consistently in excess of $1 billion. Considering that Invokana has performed favorably compared to Januvia in clinical trials as well, Merck will need to complement its star diabetes medication with new cash cows.

For income investors, that's a question with few answers. Odanacatib has looked good in clinical trials and, should it be approved, will launch into the market as Eli Lilly's (NYSE: LLY) competing bone treatment Evista loses patent protection early next year. Evista made more than $1 billion last year for Eli Lilly, so that company's loss looks like Merck's win. But odanacatib still has to be approved, despite looking strong in trials. Income investors have to hope those clinical studies won't be questioned by the FDA, also.

Merck's recent poor earnings have hurt the company's flexibility in raising its dividend in the future, something it's done in consecutive years only since 2011. The stock's 3.6% yield might be tempting, but if Merck can't find some future stars in its heavily funded R&D department, it'll be hard-pressed to combat the patent cliff's salvos against its top and bottom lines in future quarters.

Red flags for dividend investorsThe prognosis is shaky at this big pharma giant, but income investors aren't yet facing disaster with this stock. Merck still has time to turn things around, and a successful regulatory approval from odanacatib would be a huge vindication for the company's R&D spending. It'd help out in shoring up the firm's revenue in a big way and provide some much-needed cash flow to safeguard the stock's top dividend.

Income investors need to stay wary, however. Merck's future might be in motion, but it needs to act now to prove to investors that it can stay among the top firms in the pharmaceutical industry -- and keep providing (and growing) its strong dividend. Anything less than that won't be enough to for income investors in such a dividend-friendly industry like big pharma.

Making the most of your dividend investingMerck has long been among health care's top dividend stocks, and this sector is a great place for any investor looking for a stable source of income. But the best investors know not to focus too hard on one industry: The best way to safeguard your portfolio is by diversifying across the market's many great sectors and dividend-friendly industries. Looking for the best dividend stocks for your portfolio? The Motley Fool's special free report "Secure Your Future With 9 Rock-Solid Dividend Stocks" outlines the Fool's favorite dependable dividend-paying stocks. Grab your free copy today by clicking here.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.